10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2020

or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to                     

Commission File No. 001-08032

SAN JUAN BASIN ROYALTY TRUST

(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)

Texas	75-6279898
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

BBVA USA

2200 Post Oak Blvd, Floor 18

Houston, Texas 77056

(Address of principal executive offices) (Zip Code)

(866) 809-4553

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” or “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Units	SJT	New York Stock Exchange

Number of Units of beneficial interest outstanding at November 16, 2020: 46,608,796

Table of Contents

	PART I. FINANCIAL INFORMATION
Item 1	Financial Statements	1
Item 2	Trustee’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 3	Quantitative and Qualitative Disclosures about Market Risk	11
Item 4	Controls and Procedures	12
	PART II. OTHER INFORMATION
Item 1	Legal Proceedings	12
Item 1A	Risk Factors	12
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3	Defaults Upon Senior Securities	12
Item 4	Mine Safety Disclosures	13
Item 5	Other Information	13
Item 6	Exhibits	14
	SIGNATURE

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SAN JUAN BASIN ROYALTY TRUST

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

	September 30, 2020 (Unaudited)		December 31, 2019 (Audited)
ASSETS
Cash and short-term investments	$	602,910	$	1,079,421
Net overriding royalty interest in producing oil and gas properties (net of accumulated amortization of $128,103,458 and $127,823,321 at September 30, 2020 and December 31, 2019, respectively)		5,172,070		5,452,207
	$	5,774,980	$	6,531,628
LIABILITIES AND TRUST CORPUS
Distribution payable to Unit Holders	$	—	$	79,421
Cash reserves		602,910		1,000,000
Trust corpus – 46,608,796 Units of beneficial interest authorized and outstanding		5,172,070		5,452,207
	$	5,774,980	$	6,531,628

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Royalty income	$	—		$	—		$	6,039,129		$	8,957,770
Interest income		396			5,633			6,010			23,347
Total income		396			5,633			6,045,139			8,981,117
General and administrative expenses		(290,344	)		(340,084	)		(1,238,724	)		(1,388,971	)
Decrease in cash reserves		289,948			334,451			397,090			419,394
Distributable income	$	—		$	—		$	5,203,505		$	8,011,540
Distributable income per Unit (46,608,796 Units)	$	0.000000		$	0.000000		$	0.111642		$	0.171890

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Financial Statements included herein.

1

CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020			2019
Trust corpus, beginning of period	$	5,172,070	$	5,586,320	$	5,452,207		$	5,844,727
Amortization of net overriding royalty interest		—		—		(280,137	)		(258,407	)
Distributable income		—		—		5,203,505			8,011,540
Distributions declared		—		—		(5,203,505	)		(8,011,540	)
Trust corpus, end of period	$	5,172,070	$	5,586,320	$	5,172,070		$	5,586,320
Distributions declared (per Unit)	$	0.000000	$	0.000000	$	0.111642		$	0.171890

These Condensed Financial Statements should be read in conjunction with the accompanying

Notes to Condensed Financial Statements included herein.

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1. Basis of Presentation

The preceding (a) condensed statement of assets, liabilities and trust corpus as of December 31, 2019 has been derived from audited financial statements, and (b) the unaudited interim condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in San Juan Basin Royalty Trust (the “Trust”) Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of BBVA USA, the trustee of the Trust (the “Trustee”), and based upon information provided to the Trust by Hilcorp San Juan L.P. (“Hilcorp”), the present owner of certain oil and gas interests originally owned by Southland Royalty Company (the “Subject Interests”) in properties located in the San Juan Basin of northwestern New Mexico (the “Royalty Income”), all adjustments, consisting only of normal recurring adjustments, have been included that are necessary to fairly present the assets, liabilities and trust corpus of the Trust at September 30, 2020, and the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2020 and 2019. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

The financial statements of the Trust are prepared on the following basis and are not intended to present the financial position and results of operations of the Trust in conformity with U.S. generally accepted accounting principles (“GAAP”):

• The net proceeds attributable to the 75% net overriding royalty interest (the “Royalty”) that burdens the Subject Interests recorded for a month is the amount computed and paid by Hilcorp to the Trustee for the Trust. Royalty Income consists of the proceeds received by Hilcorp from the sale of production, less accrued production costs, development and drilling costs, applicable taxes, operating charges, and other costs and deductions, multiplied by 75%. The calculation of net proceeds by Hilcorp for any month includes adjustments to proceeds and costs for prior months and affects the Royalty Income paid to the Trust and the distribution to Unit Holders for that month. See Item 2 Part I of this Quarterly Report on Form 10-Q entitled “Gross Proceeds and Severance Tax Estimates” for a more detailed explanation of the estimate and true-up process for distributable income reporting and distributions to Unit Holders.

• Although permitted under the Net Overriding Royalty Conveyance that transferred the Royalty to the Trust (the “Conveyance”), Hilcorp has informed the Trust that, for wells operated by Hilcorp, it generally does not intend to accrue lease operating expenses to the Trust.

• Hilcorp has informed the Trust that oil revenue is typically reported to the Trust based on actual volumes and pricing and that due to timing, Hilcorp reports accrued natural gas revenues to the Trust based on actual production volumes from the meters. Generally, Hilcorp reconciles the natural gas revenue accruals with the plant processing statements the month following the previously reported financial information.

• Trust expenses recorded are based on liabilities paid and cash reserves established from Royalty Income for liabilities and contingencies.

• Distributions to Unit Holders are recorded when declared by the Trustee.

• The Conveyance provides that any excess production costs applicable to the Subject Interests over gross proceeds from such properties must be recovered from future net proceeds before Royalty Income is again paid to the Trust. The Trust is not obligated to reimburse Hilcorp for any excess production costs if future gross proceeds from the Subject Interests are insufficient to cover such costs. Gross excess production costs applicable to the Subject Interests were $92,000 as of September 30, 2020, with 75%, or $69,000 (net) allocated to the Trust.

The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued in the month of production; certain cash reserves may be established for liabilities and contingencies that would not be accrued in financial statements prepared in accordance with GAAP; expenses are recorded when paid instead of when incurred; and amortization of the Royalty calculated on a unit-of-production basis is charged directly to trust corpus instead of as an expense. Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trust’s financial statements, including the provisions of ASC 842, Leases. The Trustee determined that this standard has no impact on the Trust’s financial statements.

The Trustee has determined that there are no additional disclosures required based on the Trust’s method of accounting. This comprehensive basis of accounting corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

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The Trustee routinely reviews the Trust’s royalty interests in oil and natural gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust’s royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, that would likely be measured by discounting projected cash flows and is charged directly to trust corpus instead of as an expense. There was no impairment of the Trust’s assets as of September 30, 2020.

2. Federal Income Taxes

For federal income tax purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit Holders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

The Trust is a widely held fixed investment trust (“WHFIT”) classified as a non-mortgage widely held fixed investment trust (“NMWHFIT”) for federal income tax purposes. The Trustee is the representative of the Trust that will provide tax information in accordance with the applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT and a NMWHFIT.

The Royalty constitutes an “economic interest” in oil and natural gas properties for federal income tax purposes. Unit Holders must report their share of the production revenues of the Trust as ordinary income from oil and natural gas royalties and are entitled to claim depletion with respect to such income. The Royalty is treated as a single property for depletion purposes. The Trust has on file technical advice memoranda confirming such tax treatment.

Under current federal income tax law, the Trust’s production and sale of natural gas from coal seam wells does not qualify for a tax credit under Section 45K (the “Section 45 Tax Credit”) of the Internal Revenue Code of 1986, as amended (the “Code”). Congress has at various times since 2002 considered energy legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and to various extents, but no legislation that would qualify the Trust’s current production for such credit has been enacted. No prediction can be made as to what future tax legislation affecting Section 45K of the Code may be proposed or enacted or, if enacted, its impact, if any, on the Trust and the Unit Holders.

The classification of the Trust’s income for purposes of the passive loss rules may be important to a Unit Holder. Royalty income such as that derived through the Trust will generally be treated as portfolio income that may not be offset or reduced by passive losses.

Tax positions taken by the Trust related to the Trust’s pass-through status and state tax positions have been reviewed, and the Trustee is of the opinion that the material tax positions it has taken would more likely than not be sustained by examination. As of September 30, 2020, the Trust’s tax years 2016 and thereafter remain subject to examination.

Each Unit Holder should consult his or her own tax advisor regarding tax compliance matters related to such Unit Holder’s interest in the Trust.

3. Commitments and Contingencies

Contingencies related to the Subject Interests that are unfavorably resolved would generally be reflected by the Trust as reductions to future Royalty Income payments to the Trust with corresponding reductions to cash distributions to Unit Holders. See Note 1 Basis of Presentation, for a summary of the terms of the Conveyance with respect to recovery of costs.

The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas. Hilcorp further informed the Trust that it does not anticipate that Covid-19 will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the impact of the Covid-19 pandemic on Hilcorp and the Subject Interests is still unknown and any such impact could result in actual results being different from Hilcorp’s expectations. Specifically, the Trust has noted that prices remain low, which may lead to further reductions from expected negative true-ups for reported estimates from earlier periods in 2020.

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4. Settlements and Litigation

None.

5. Subsequent Events

On October 20, 2020, the Trust reported that Hilcorp had advised the Trust that the August 2020 reporting month included a reimbursement by the Trust to Hilcorp of $0.5 million, as the remaining portion of the total $2.0 million in “Other” revenue that was included in the estimated gross proceeds in the December 2017 and January 2018 distribution months. In addition, the Trustee replenished the Trust’s cash reserves during the third quarter by $0.4 million to bring the cash reserve balance back to the previously established amount of $1.0 million.

Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture entered into on November 1, 1980 between Southland Royalty Company (“Southland”) and The Fort Worth National Bank (the “Original Indenture”). The Original Indenture was amended and restated on September 30, 2002, and further amended and restated on December 12, 2007, which the Trust refers to as the “Indenture” in this Quarterly Report on Form 10-Q. Because of a series of mergers and other transactions involving the Trustee of the Trust, the current Trustee of the Trust is BBVA USA, which is a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.

The Conveyance and the Royalty

Pursuant to the Net Overriding Royalty Conveyance (the “Conveyance”) effective November 1, 1980, Southland conveyed the Royalty that burdens the Subject Interests in properties located in the San Juan Basin of northwestern New Mexico to the Trust. Subsequent to the Conveyance of the Royalty, through a series of sales, assignments and mergers, Southland’s successor became Hilcorp, which acquired the Subject Interests from Burlington Resources Oil & Gas Company LP (“Burlington”), an indirect wholly-owned subsidiary of ConocoPhillips, on July 31, 2017.

The Royalty constitutes the principal asset of the Trust. The beneficial interest in the Royalty is divided into 46,608,796 units (the “Units”) representing undivided fractional interests in the beneficial interest of the Trust equal to the number of shares of the common stock of Southland outstanding as of the close of business on November 3, 1980. Each stockholder of Southland of record at the close of business on November 3, 1980 received one freely tradable Unit for each share of the common stock of Southland then held. Holders of Units in the Trust are referred to herein as “Unit Holders.”

The Trustee

The primary function of the Trustee is to collect Royalty Income, to pay all expenses and charges of the Trust and distribute the remaining available income to the Unit Holders. The amount of income distributable to Unit Holders, which we refer to as “Distributable Income,” depends on the amount of Royalty Income and interest received by the Trust, as well as the amount of expenses paid by the Trust and any change in cash reserves. The Trust has no employees, officers or directors. All administrative functions of the Trust are performed by the Trustee. Effective June 10, 2019, Compass Bank changed its name to BBVA USA.

Hilcorp

Hilcorp is the principal operator of the majority of the Subject Interests and is responsible, subject to the terms of a prior agreement with the Trust, for marketing the oil and natural gas production from such properties, either under existing sales contracts or under future arrangements, at the best prices and on the best terms it shall deem reasonably obtainable under the circumstances. A very high percentage of the Royalty Income is attributable to the production and sale by Hilcorp of natural gas from the Subject Interests. Accordingly, the market price and demand for natural gas produced and sold from the San Juan Basin heavily influences the amount of Royalty Income distributed by the Trust and, by extension, the price of the Units.

Gross Proceeds and Severance Tax Estimates. The sale of San Juan Basin assets, including the Subject Interests, from Burlington to Hilcorp closed on July 31, 2017. Hilcorp has advised the Trust that for certain months (since the closing of its purchase of the assets), it has reported estimates of cash revenues and expenses based on the best information available to it at the time, instead of reporting actual amounts. Hilcorp further has informed the Trust that it believes that its estimates have been prepared in accordance with the Conveyance, and the Trust and its advisors continue to review such estimates for compliance with the Conveyance.

5

Hilcorp’s process of reconciling actual revenue and severance taxes to previously reported estimates (which the Trust refers to as “true-ups”) during fiscal years 2017, 2018, and 2019 are still occurring and being reported in 2020. Hilcorp has informed the Trust that as it continues to refine further its estimating and reporting processes, Hilcorp will review prior periods to ensure greater accuracy and consistency, both for prior periods as well as future reporting periods. As part of that review process, Hilcorp informed the Trust that it will reverse and rebook revenue for certain prior periods. Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustments based upon prior months’ true-ups and rebooking, plus interest.

During the three months ended September 30, 2020, Hilcorp made true-up and rebooking adjustments to oil, gas, and other revenue and severance tax resulting in additional profits of $0.4 million gross (approximately $0.3 million net to the Trust) based on the production months of January through March 2018, January, August and December 2019, and January and February 2020. The total of true-up and rebooking adjustments for the nine months ended September 30, 2020 was an additional profit of $58,000 gross ($43,500 net).

Hilcorp notified the Trust that as of the date of this Quarterly Report, it will still need to adjust the previously reported production and financial information for the production months of April 2018 through December 2018 for operated wells and October 2017 through December 2017 and April 2018 through December 2018 for non-operated wells and, therefore, possibly adjust future distributions of net proceeds to reflect such rebooking and true-ups plus interest on such amounts (as required by the Conveyance) to the extent an under-or over-payment has occurred.    

$2.0 Million in Additional “Other” Gross Proceeds Estimates. The Trust has been advised by Hilcorp that during the period following the closing of its purchase of the Subject Interests from Burlington, Hilcorp included an additional $1.0 million in “Other” revenue in the gross proceeds estimates in each of the December 2017 and January 2018 distribution months. This additional $2.0 million in “Other” revenue was based on Hilcorp’s estimated increases in natural gas production that were subsequently offset by lower natural gas prices.

The third quarter of 2020 included a reduction of $1.5 million in “Other” gross proceeds, which reduced, but did not eliminate, the previously reported $2.0 million in estimated “Other” gross proceeds. As of the date of this Quarterly Report, Hilcorp has not yet trued-up the remaining $0.5 million in “Other” gross proceeds. As a result, once Hilcorp has finalized its true-ups, there could be a negative adjustment to the “Other” gross proceeds consisting of a reduction in Royalty Income to the Trust by Hilcorp of the remaining estimated payment of up to $0.5 million.

Commodity Prices. The Trust’s income and monthly distributions from the Subject Interests are heavily influenced by the price of oil and natural gas. These prices may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas-based on market uncertainty or a variety of additional factors that are beyond the Trustee’s control. During the first two quarters of 2020, oil and natural gas prices decreased substantially due to significantly decreased demand as a result of the novel coronavirus (“Covid-19”) pandemic. While oil and gas natural prices have increased in the third quarter, they are still below pre-pandemic levels. Additionally, a dispute over oil production levels between Russia and members of the Organization of Petroleum Exporting Countries (“OPEC”) created an oversupply of crude oil. The dispute was ultimately resolved through agreed-upon production cuts, but not until June 2020. Both events put substantial downward pressure on the price of oil and natural gas in the first and second quarters of 2020, and while prices have somewhat recovered and largely stabilized, the Trust cannot guarantee that the prices will not continue to be negatively affected by the aforementioned events.

6

Results of Operations – for the Three and Nine Months Ended September 30, 2020 and 2019

Royalty Income

Royalty Income consists of monthly net proceeds attributable to the Royalty. Royalty Income for the three and nine months ended September 30, 2020 and 2019 was determined as shown in the following table:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Gross proceeds from the Subject Interests:
Natural Gas	$	8,474,484		$	8,736,787		$	28,640,859		$	39,499,293
Oil		398,805			1,183,844			1,043,043			2,436,428
Other		(773,604	)(1)		709,058	(2)		(877,651	)(1)(3)		1,723,058	(2)
Total		8,099,685			10,629,689			28,806,251			43,658,779
Production Costs:
Severance tax – gas		1,332,878			850,397			2,748,720			4,293,406
Severance tax – oil		95,451			98,879			151,368			203,331
Lease operating expense and property tax		5,113,994			6,970,908			17,809,264			21,720,102
Capital expenditures		60,486			4,690,372			120,665			7,650,613
Other(4)		16,065			18,676			16,065			18,676
Total		6,618,874			12,629,232			20,846,082			33,886,128
Production costs in excess of gross proceeds		(1,480,811	)(5)		1,999,543			92,003			2,171,042
Net profits		—			—			8,052,172			11,943,693
Net overriding royalty interest		75	%		75	%		75	%		75	%
Royalty Income		—			—		$	6,039,129		$	8,957,770

1. Estimated revenue from non-operated properties and true-ups and adjustments of non-operated revenue for the production months of January through March 2018, negatively offset by a reduction of $1.5 million in “Other” gross proceeds, being a portion of the total $2.0 million in “Other” revenue included in the estimated gross proceeds in the December 2017 and January 2018 distribution months.

2. Estimated revenue from outside-operated properties, handling and processing income, and $0.2 million from granted exceptions.

3. Estimated revenue from non-operated properties and granted audit exceptions with interest as a result of the 2018 audit, negatively offset by Hilcorp’s true-ups and adjustments of non-operated revenue from the February 2019 through July 2019 and October 2019 through November 2019 production months.

4. Interest charges on excess production costs.

5. Net proceeds (gross proceeds less production costs) for the three months ended September 30, 2020, were $1,480,811, which reduced, but did not eliminate, the prior excess production costs of $1,572,814 from the three months ended June 30, 2020. Gross excess production costs applicable to the Subject Interests were $92,000 as of September 30, 2020, with 75%, or $69,000 (net), allocated to the Trust.

There was no Royalty Income distributed to the Trust in the three months ended September 30, 2020 due to excess production costs from the April 2020 production month. No Royalty Income was distributed to the Trust in the third quarter of 2019 primarily due to Hilcorp’s increased capital spending pursuant to its 2019 capital spending plan. The Royalty Income distributed to the Trust for the nine months ended September 30, 2020 was lower than that distributed during the nine months ended September 30, 2019 due primarily to lower natural gas pricing and a decrease in natural gas production. The average natural gas price increased from $1.26 per Mcf for the three months ended September 30, 2019 to $1.46 per Mcf for the three months ended September 30, 2020, and the average natural gas price decreased from $1.86 per Mcf for the nine months ended September 30, 2019 to $1.47 per Mcf for the nine months ended September 30, 2020. Production of natural gas from the Subject Interests decreased from 6,925.842 Mcf for the three months ended September 30, 2019 to 5,786,304 Mcf for the three months ended September 30, 2020, and from 21,290,114 Mcf for the nine months ended September 30, 2019 to 19,521,825 Mcf for the nine months ended September 30, 2020.

7

Gross Proceeds from Subject Interests. Total Gross proceeds decreased approximately $2.5 million, or 24%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, and decreased approximately $14.9 million, or 34%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was due primarily to lower natural gas production and decreased natural gas prices along with a reimbursement by the Trust to Hilcorp of $1.5 million, being a portion of the total $2.0 million in “Other” revenue included in the estimated gross proceeds in the December 2017 and January 2018 distribution months.

Capital Expenditures. Capital expenditures by Hilcorp decreased approximately $4.6 million, or 99%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, and decreased approximately $7.5 million, or 98%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was attributable to Hilcorp’s reduced capital spending plan that the Trust announced on February 24, 2020 (the “2020 Plan”). The 2020 Plan calls for total capital spending of $0.3 million for fiscal 2020.

Severance Taxes. Aggregate severance taxes increased approximately $0.5 million, or 50%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, and decreased approximately $1.6 million, or 36%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The percentage increase in the three-month period is primarily attributable to Hilcorp’s true-ups of the first quarter of 2018 natural gas and oil severance taxes and the percentage decrease over the nine-month period is primarily due to lower revenue. Severance taxes represented approximately 18% of gross proceeds for the three months ended September 30, 2020, compared to approximately 9% for the same period of 2019. The increase is primarily attributable to Hilcorp’s true-ups of the first quarter of 2018 natural gas and oil severance taxes. Severances taxes represented approximately 10% of gross proceeds for both nine-month periods ended September 30, 2020 and 2019.

Lease Operating Expenses and Property Taxes. Lease operating expenses and property taxes decreased $1.9 million, or 27%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and decreased $3.9 million, or 18%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease is primarily due to lower compression and well servicing expenses in addition to decreases across other cost categories due to Hilcorp’s efforts to reduce operating costs in the current price environment.

Monthly lease operating expenses of the Subject Interests, including property taxes, for the three months ended September 30, 2020 averaged approximately $1.7 million, compared to $2.3 million for the three months ended September 30, 2019. Monthly lease operating expenses of the Subject Interests, including property taxes, for the nine months ended September 30, 2020 averaged $2.0 million, compared to an average of $2.4 million for the nine months ended September 30, 2019.

Distributable Income

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Royalty income	$	—		$	—		$	6,039,129		$	8,957,770
Interest income		396			5,633			6,010			23,347
Total income		396			5,633			6,045,139			8,981,117
General and administrative expenses		(290,344	)		(340,084	)		(1,238,724	)		(1,388,971	)
Decrease in cash reserves		289,948			334,451			397,090			419,394
Distributable income	$	—		$	—		$	5,203,505		$	8,011,540
Distributable income per Unit (46,608,796 Units)	$	0.000000		$	0.000000		$	0.111642		$	0.171890

Distributable Income. There was no Distributable Income in either of the three month periods ended September 30, 2020 and 2019. Distributable Income decreased by approximately $2.8 million, or 35%, to $5.2 million ($0.111642 per Unit) for the nine months ended September 30, 2020 from $8.0 million ($0.171890 per Unit) for the nine months ended September 30, 2019. There was no Distributable Income in the third quarter of 2020 due primarily to lower gas production and to true-ups of prior periods by Hilcorp resulting in excess production costs from the April 2020 production month. Gross excess production costs applicable to the Subject Interests were $92,000 as of September 30, 2020, with 75%, or $69,000 (net) allocated to the Trust.

8

Based on 46,608,796 Units outstanding, the per-Unit distributions during the third quarter of 2020 were as follows:

July	$	0.000000
August		0.000000
September		0.000000
Quarter Total	$	0.000000

Interest Income. Interest income was lower for the three and nine months ended September 30, 2020 as compared to the same periods in 2019 due primarily to lower yields on short-term investments and lower cash balances.

General & Administrative Expenses. General and administrative expenses decreased approximately 15%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and decreased approximately 11%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily attributable to differences in timing in the receipt and payment of certain expenses by the Trust.

Cash Reserves. The Trust withdrew approximately $0.3 million from its cash reserve during the third quarter of 2020 to pay the Trust’s general and administrative expenses due to the Trust receiving no Royalty Income during that period. Total cash reserves were approximately $0.6 million as of September 30, 2020. The primary purpose of the cash reserves is to have sufficient funds to cover monthly general and administrative expenses in the event that there is insufficient Royalty Income to cover such expenses. The Trustee will replenish the cash reserve once it begins to receive Royalty Income from Hilcorp. The Trustee does not anticipate any increases to the cash reserve above a level of $1.0 million in 2020, although it cannot guarantee that the Trustee will not increase such cash reserves in the future.

Liquidity and Capital Resources

The Trust’s principal source of liquidity and capital is Royalty Income. The Trust’s distribution of income to Unit Holders is funded by Royalty Income after payment of Trust expenses. The Trust is not liable for any production costs or liabilities attributable to the Royalty. If at any time the Trust receives more than the amount due under the Royalty, it is not obligated to return such overpayment, but the amounts payable to it for any subsequent period are reduced by such amount, plus interest, at a rate specified in the Conveyance. If the Trustee determines that the Trust does not have sufficient funds to pay the Trust’s liabilities, the Trustee may borrow funds on behalf of the Trust, in which case no distributions will be made to Unit Holders until such borrowings are repaid in full. The Trustee may not sell or dispose of any part of the assets of the Trust without the affirmative vote of 75% of all of the Units outstanding; however, the Trustee may sell up to 1% of the value of the Royalty (as determined pursuant to the Indenture) during any 12-month period without the consent of the Unit Holders.

In the event the Trust does not receive sufficient net cash payments from Hilcorp, the Trust believes it has sufficient capacity to draw upon the cash reserve amount or borrow funds against the Royalty to cover the Trust’s operating expenses until its cash reserve can be replenished from net cash payments from Hilcorp

The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas. Hilcorp further informed the Trust that it does not anticipate that Covid-19 will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the impact of the Covid-19 pandemic on Hilcorp and the Subject Interests is still unknown and any such impact could result in actual results being different from Hilcorp’s expectations. Specifically, the Trust has noted that prices remain low, which may lead to further reductions from expected negative true-ups for reported estimates from earlier periods in 2020.

As noted in the Subsequent Events section above, the Trust replenished its cash reserves to $1.0 million in October. Additionally, per its October 20, 2020 press release and Current Report on Form 8-K, the Trust made a monthly cash distribution to the holders of its Units of $651,100.95, or $0.013969 per Unit, based primarily upon production during the month of August 2020.

Oil and Natural Gas Production

The natural gas volumes reported to the Trust by Hilcorp are based on plant residue gas volumes plus equivalent volumes for natural gas liquids. Hilcorp converts one barrel of natural gas liquids to six Mcf of natural gas using industry standards.

9

Royalty Income for the three months ended September 30, 2020 is associated with oil and natural gas production during May through July 2020 from the Subject Interests. Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the three months ended September 30, 2020 and 2019 were as follows:

	For the Three Months Ended September 30,
	2020				2019
	Natural Gas (Mcf)		Oil and Condensate (Bbls)		Natural Gas (Mcf)			Oil and Condensate (Bbls)
Production
Subject Interests		5,786,304		14,195		6,925,842			26,139
Royalty		946,233		6,245		(2,567,495	)(1)		17,512
Average Price (per Mcf/Bbl)	$	1.46	$	28.09	$	1.26		$	45.29

¹  The oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost, including Hilcorp’s capital expenditures pursuant to its 2019 CapEx Plan. The allocation formula for natural gas produced a negative volume due to excess production costs during the three month ended September 30, 2019.

Production of oil and natural gas and related average sales prices attributable to each of the Subject Interests and the Royalty for the nine months ended September 30, 2020 and 2019 were as follows:

	For the Nine Months Ended September 30,
	2020				2019
	Natural Gas (Mcf)		Oil and Condensate (Bbls)		Natural Gas (Mcf)		Oil and Condensate (Bbls)
Production
Subject Interests		19,521,825		33,517		21,290,114		53,710
Royalty		1,951,351		16,408		796,414		32,746
Average Price (per Mcf/Bbl)	$	1.47	$	31.12	$	1.86	$	45.36

The Trust recognizes production during the month in which the related net proceeds attributable to the Royalty are paid to the Trust. Royalty Income for a calendar year is based on the actual natural gas and oil production during the period beginning with November of the preceding calendar year through October of the current calendar year. Sales volumes attributable to the Royalty are determined by dividing the net profits by the Trust from the sale of oil and natural gas, respectively, by the prices received by Hilcorp for sales of such volumes from the Subject Interests, taking into consideration production taxes attributable to the Subject Interests. Because the oil and natural gas sales attributable to the Royalty are based upon an allocation formula dependent on such factors as price and cost, including Hilcorp’s capital expenditures and the timing of Hilcorp’s true-ups of prior reported estimated oil and natural gas production data, the aggregate sales amounts from the Subject Interests may not provide a meaningful comparison to sales attributable to the Royalty. Future true-ups will affect future royalty proceeds, but will not change the reported amounts due to the accounting basis used.

The fluctuations in natural gas production that have occurred during the three-month period ended September 30, 2020 and 2019, respectively, generally resulted from changes in the demand for natural gas during that time, market conditions, and variances in capital spending to generate production from new and existing wells, as offset by the natural production decline curve. In addition, production from the Subject Interests is influenced by the line pressure of the natural gas gathering systems in the San Juan Basin. As noted above, oil and natural gas sales attributable to the Royalty are based on an allocation formula dependent on many factors, including oil and natural gas prices and capital expenditures.

Marketing

There were no changes to the contracts pursuant to which Hilcorp sells production from the Subject Interests and for the gathering and processing of production during the three months ended September 30, 2020.

10

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

For a discussion of significant accounting policies and estimates that affect the Trust’s financial statements, see Part I, Item 1. Unaudited Financial Statements, Note 1 Basis of Presentation and Part II, Item 8. Financial Statements and Supplemental Data contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019.

Information Regarding Forward-Looking Information

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Trust with the SEC (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements may involve or may concern, among other things, the amount and variability in capital expenditures by Hilcorp, drilling activity, development activities, production efforts and volumes, hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the Trust’s activities, the differences between Hilcorp’s estimated revenue and actual revenue, and regulatory matters. Such forward-looking statements generally are accompanied by words such as “may,” “will,” “based,” “estimate,” “expect,” “predict,” “project,” “anticipate,” “believe,” “plan,” “intend,” or other words that convey the uncertainty of future events or outcomes. Such statements are based on certain assumptions of BBVA USA, the Trustee, and by Hilcorp, with respect to future events; are based on an assessment of, and are subject to, a variety of factors deemed relevant by the Trustee and Hilcorp; and involve risks and uncertainties. However, whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties which could affect the future results of the energy industry in general, and the Trust and Hilcorp in particular, and could cause those results to differ materially from those expressed in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on Hilcorp’s business and the Trust. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. The Trust undertakes no obligation to publicly update or revise any forward-looking statements, except as required by applicable law.

Hilcorp Information

As a holder of a net overriding royalty interest, the Trust’s reporting of financial information is reliant upon Hilcorp to accurately and timely report information regarding Hilcorp and its affiliates; the Subject Interests, including the operations, acreage, well and completion count, working interests, production volumes, sales revenues, capital expenditures, operating expenses, reserves, drilling plans, drilling results and leasehold terms related to the Subject Interests, and factors and circumstances that have or may affect the foregoing. See Part I, Item 4. Controls and Procedures.

The Trust continues to request periodic updates from Hilcorp as to its production and financial expectations with respect to the Subject Interests due to any effects caused by the ongoing Covid-19 pandemic and the recent fluctuations in oil and gas pricing. Hilcorp has informed the Trust that, given the current natural gas pricing environment, Hilcorp does not anticipate materially reducing any of the Subject Interests’ production or taking any of the Subject Interests’ wells offline; however, both the Trust and Hilcorp continue to monitor the impact that Covid-19 may have on production, including as it relates to personnel availability in New Mexico and other Subject Interest areas. Hilcorp further informed the Trust that it does not anticipate that Covid-19 will have any material impact on its operation of the Subject Interests or on its payments of Royalty Income to the Trust. However, the impact of the Covid-19 pandemic on Hilcorp and the Subject Interests is still unknown and any such impact could result in actual results being different from Hilcorp’s expectations. Specifically, the Trust has noted that prices remain low, which may lead to further reductions from expected negative true-ups for reported estimates from earlier periods in 2020.

For information on the Trust’s exposure to market risk, please see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

None.

11

Item 4. Controls and Procedures.

The Trust maintains a system of internal disclosure controls and procedures that is designed to ensure that the information required to be disclosed in the Trust’s filings under the Exchange Act is recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms. In its evaluation of its disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by Hilcorp, the owner of the properties. Consequently, the Trust’s ability to disclose timely and accurately relevant information in its periodic reports is dependent upon Hilcorp’s timely delivery of accurate oil and gas revenue and production cost information and, therefore, the net proceeds owed to the Trust.

The Net Overriding Royalty Conveyance (the “Conveyance”) that transferred the royalty to the Trust obligates Hilcorp to provide the Trust with certain financial and operational information, including information concerning calculations of net proceeds owed to the Trust. Once the Trust receives the financial information from Hilcorp, the Trust engages independent public accountants, compliance auditors, attorneys and petroleum engineers in order to assist the Trustee to ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic reports. These outside professionals advise the Trustee in its review and compilation of this information for inclusion in this Quarterly Report on Form 10-Q and the other periodic reports provided by the Trust to the SEC.

Despite the Trust’s internal controls and procedures ensuring the accuracy of the Trust’s reporting based upon the financial information received from Hilcorp, Hilcorp’s process of reconciling actual revenue and severance taxes to previously reported estimates and reversing and rebooking periods during fiscal 2017, 2018, and 2019 are still occurring and being reported in 2020. Thus, distributions to the Trust from Hilcorp in any given month may be subject to adjustment based upon prior months’ true-ups and rebooking, plus interest. Hilcorp notified the Trust that as of the date of this Quarterly Report, it will still need to adjust the previously reported production and financial information for the production months of April 2018 through December 2018 for operated wells and October 2017 through December 2017 and April 2018 through December 2018 for non-operated wells and, therefore, possibly adjust future distributions of net proceeds to reflect such rebooking and true-ups plus interest on such amounts (as required by the Conveyance) to the extent an under- or over-payment has occurred.

The Trustee has evaluated the Trust’s internal disclosure controls and procedures as of September 30, 2020, and has concluded that such disclosure controls and procedures are effective, at the “reasonable assurance” level (as such term is used in Rule 13a-15(f) of the Exchange Act), to ensure that material information received from Hilcorp is gathered on a timely basis to be included in the Trust’s periodic reports and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Additionally, during the three months ended September 30, 2020, there were no changes in the Trust’s internal control over financial reporting (as such term is used in Rule 13a-15(f) of the Exchange Act) that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting. Because the Trust does not have, nor does the Indenture provide for, officers, a board of directors or an independent audit committee, the Trustee has reviewed neither the Trust’s disclosure controls and procedures nor the Trust’s internal control over financial reporting in concert with management, a board of directors or an independent audit committee.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Not required.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

12

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

13

Item 6. Exhibits.

Exhibit Number	Description
(4)(a)	San Juan Basin Amended and Restated Royalty Trust Indenture, dated December  12, 2007, filed as Exhibit 99.2 to the Trust’s Current Report on Form 8-K filed with the SEC on December 14, 2007, and incorporated herein by reference.*
(4)(b)	Net Overriding Royalty Conveyance from Southland Royalty Company to The Fort Worth National Bank, as Trustee, dated November  1, 1980 (without Schedules), filed as Exhibit 4(b) to the Trust’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2006 on March  1, 2007, and incorporated herein by reference.*
(4)(c)	Assignment of Net Overriding Interest (San Juan Basin Royalty Trust), dated September  30, 2002, between Bank One, N.A. and Texas Bank, filed as Exhibit 4(c) to the Trust’s Quarterly Report on Form 10-Q filed with the SEC for the quarter ended September  30, 2002, and incorporated herein by reference.*
31	Certification required by Rule 13a-14(a), dated November 16, 2020, by Joshua R. Peterson, Head of Trust Real Assets  & Mineral Resources and Senior Vice President of BBVA USA, the Trustee of the Trust.**
32	Certification required by Rule 13a-14(b), dated November 16, 2020, by Joshua R. Peterson, Head of Trust Real Assets  & Mineral Resources and Senior Vice President of BBVA USA, on behalf of BBVA USA, the Trustee of the Trust.***

* A copy of this exhibit is available to any Unit Holder (free of charge) upon written request to the Trustee, BBVA USA, 2200 Post Oak Blvd., Floor 18, Houston, Texas 77056.

** Filed herewith.

*** Furnished herewith.

14

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BBVA USA, AS TRUSTEE OF THE
SAN JUAN BASIN ROYALTY TRUST
By:	/s/ Joshua R. Peterson
	Joshua R. Peterson
	Head of Trust Real Assets & Mineral Resources and Senior Vice President

Date: November 16, 2020

(The Trust has no directors or executive officers.)

EX-31

EXHIBIT 31

CERTIFICATION

I, Joshua R. Peterson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of San Juan Basin Royalty Trust, for which BBVA USA acts as Trustee;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, distributable income and changes in trust corpus of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and I have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including any consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves persons who have a significant role in the registrant’s internal control over financial reporting.

In giving the certifications in paragraphs 4 and 5 above, I have relied to the extent I consider reasonable on information provided to me by Hilcorp San Juan L.P.

Date: November 16, 2020	By:	/s/ Joshua R. Peterson
		Joshua R. Peterson
		Head of Trust Real Assets & Mineral Resources and Senior Vice President

EX-32

EXHIBIT 32

CERTIFICATION OF

THE TRUSTEE*

OF THE SAN JUAN BASIN ROYALTY TRUST

PURSUANT TO 18 U.S.C. § 1350

In connection with the accompanying report on Form 10-Q for the quarter ended September 30, 2020 and filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joshua R. Peterson, Head of Trust Real Assets & Mineral Resources and Senior Vice President of BBVA USA, on behalf of BBVA USA, the Trustee of the San Juan Basin Royalty Trust (the “Trust”),* not in its individual capacity but solely as Trustee of the Trust, hereby certify that:

1. The Report fully complies in all material respects with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (as explained in Note 1 to the Trust’s financial statements contained in the Report, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts, the Trust prepares its financial statements in a manner that differs from generally accepted accounting principles; such presentation is customary to other royalty trusts); and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust.

BBVA USA, AS TRUSTEE OF THE
SAN JUAN BASIN ROYALTY TRUST
By:	/s/ Joshua R. Peterson
Name:	Joshua R. Peterson
Title:	Head of Trust Real Assets & Mineral Resources and Senior Vice President
Date:	November 16, 2020

* The Trust has no executive officers.